What is Margin Trading?

Financial markets have various terminologies and traders need to be aware of each of these. Margin trading is one such term which is highly used by traders and service providers.

In the article, we’ll be discussing margin trading and how it works to support financial traders. So, let’s understand the market more deeply and have good market insight for a profitable and successful trading journey.

Defining Margin Trading

In financial trading, margin is the collateral that traders have to deposit with brokers or exchanges to cover credit risk. The credit risk is in the form of leverage they have borrowed from the broker or exchange.

Traders take loans in the form of leverage from the financial service providers. The loan has to be repaid and for reassurance purposes traders are required to maintain a margin to get the leverage facility.

So, in short we can refer to margin as the cover up cost for the leverage.

How Margin Works?

Traders when open their trading account, they can use the service of margin trading. They have to open a margin account the broker then disburses the funds which the traders can use for trading in various assets.

The amount which is disbursed is the loan against the collateral cash or the minimum margin.

For example, you are trading in financial instruments and you do not have much funds to trade. So, in this case you can open a margin trading account with your broker or exchange.

Once you have the account you deposit a minimum collateral amount. After which the platform allows you to avail the facility of leverage. You can take the loan to open a new market position and make profitable trades.

SEBI Regulations on Margin Trading

In India, SEBI is the government organisation that looks into financial trading. Until now, margin trading in India was allowed only through cash, while the shares provided as collateral was restricted.

However, as per the new regulations of 2018 traders can now leverage their position through margin trading. They can provide shares as security to the broker or exchange.

Also, margin accounts are only provided by the authorised brokers as per the SEBI regulations.

Advantages of Margin Trading

Margin trading is used by traders but very few of them are aware of its actual meaning. In the article we have discussed margin trading but what all advantages does it provides to learn that below we have the best of margin benefits:

Short Term Profit Generation

The first benefit of margin trading is traders can use it for short term profit generation. They can trade in assets and go for short term fluctuations to earn profit using margin.

Leverage Position

The second benefit that traders can have with margin trading is leverage position. They can use margin to leverage their position in the assets that are not from the derivatives sector.

Increased Returns

Third benefit for traders with margin is to increase their returns on trade. They can maximise the rate of return on the capital they have traded in the market.

Margin Call

Margin call is a significant term that relates with margin trading. The margin call is placed when the margin account balance is less than the minimum required. The margin fund is low because of the loss the trade faces.

Therefore, the broker makes the call to inform the trader regarding the lack of funds for further trading. They have to deposit the funds to trade using leverage.

Brokers have the right to insist traders to deposit funds and maintain a minimum margin. Also, if a trader is not able to do so, then the broker can square off the order at market price.

Conclusion

Margin trading is a highly used financial term. Traders keep using the term or the facility in financial markets. Therefore, to make traders and especially newbies unaware of the terminology we have discussed margin trading.

They can understand what margin trading is and how it works. Besides, traders can also know the advantages and what is margin call in the trading. Thus, a brief yet deep insight of margin trading.

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